The psychology of trading is as important as the trading system itself. If you do not suffer from the emotions of trading then you are either gifted or you have never built your trading account into a large enough amount of money. This subject is so large I couldn’t possibly get everything in this section without filling hundreds of pages and I don’t want to bore you, so I am only going to cover the things I believe will help you the most to understand what you are about to face in your venture into the forex world, especially when you begin to start making large amounts of money.
Stage 1: Greed is the first thing a new trader will face when starting out in the forex world, particularly when the individual has a grasp of trading forex and the huge amount of money that can be made in a small amount of time. Greed involves over trading and refusing to exit a trade when it is blatantly obvious the move is over. Or, on the other hand the inability to realise that their predictions were wrong resulting in them being unable to cut their losses and accept that the trade was a mistake. Usually this emotion of denial is formed due to the new trader having a small does of success in his totally random guessing of the market direction.
This small dose of success leads them to believe that the forex market is actually easy money (which it can be once you get it right) and for some reason they have an expert talent that enables them to predict the markets direction perfectly (which they do not have). When the market decides not to participate in agreeing with this random traders decisions they have trouble accepting that they were in fact wrong and if they were to stay in the trade long enough it would come back in the anticipated direction. Then they will prove once again that they are in fact a master trader. At this point most traders lose their entire trading account trying to prove themselves in the market. Whether the trader moves on and learns from this mistake is usually dependent on the size of the trading account lost and the pain of blowing out a first account.
Stage 2: This is usually the most exciting and most sole destroying stage of trading, at this point you actually do have a clue what you are doing and you are at a stage where you are back trading at the same size account you were before it was eaten up by the market in stage 1. This is the stage that highlights every flaw that will need to be addressed in your character in order for you to succeed at forex. This is the point many of you reading this book will find yourself at soon enough, you will have the ability to make huge amounts of money from trading forex, you will have a solid system but only your fear will stop you from becoming a truly successful trader. Let’s look into this a little more, now we know that a good system can have a winning edge of 70% this means that out of 100 trades you can expect to have around 30 losses.
The only thing you have no idea about is when these losses will hit and how many you may have in a row. You begin trading with a nice string of winning trades which send you on a high making you feel like you have conquered the world but suddenly you hit a loss, then another and another. Soon enough you have lost 4 trades in a row, you are now far from feeling on top of the world if you were trading 3% of you account on each trade you have lost over 12% of your account or in $ value if you had a $100,000 account you have lost $12,000. At this point it hits home that you have just lost the equivalent of 6 months of wages from an average persons wage in just a few days. You are now very wary of making another trade and when the moment comes you decide to sit on the side lines and watch how it plays out.
The trade does exactly as you anticipated but yet you still feel a little hesitant to make a trade so you sit on the side lines for the next trade which was also a winner. Ok so the losing streak is over you place a trade on the next signal and guess what, yes you lose again! If you had not let your fear take over your trading decisions and you had followed your system at this point you would be way ahead and in profit instead you are heading for a 20% loss in your account. Now you might clearly see what is wrong here but when those emotions come into play it is often difficult to see the light. Trading forex is about having the discipline to follow the rules and trade your system no matter what your gut is telling you. Obviously you don’t want to follow your system into the ground, I generally have a cut off point at 50%, so if my trading account ever gets drawn down by 50% I stop trading completely until I figure out what went wrong. But until this cut off point is met I follow my system without fail.
Stage 3: This is the turning point for most traders, this is the point they either decide that trading is not for them and hang up their trading shoes or the light goes on in their head and they really start cooking on gas. Those who make it to this stage are usually no longer concerned with the day to day results of trading, winning a trade is no more exciting than losing a trade because they know that it is simply the law of average playing out on their trading edge and overall they will always be in profit.
